This Key Rule Will Help Keep Your Investing Simple


If you remember this guideline, you’re likely to do just fine in the markets.

Between price targets, charts, portfolio balancing, regressing to the mean and a host of other terms and concepts, investing can become pretty bewildering pretty fast. 

Real Money Columnist Paul Price says there are ways to keep it all clear, starting with a simple rule.

“As of Monday the S&P 500 was down 12.20% over the first 50 trading days this year,” Price wrote recently on Real Money. “Of course it moved up a bit this week, but still, it’s been a bummer if you’ve been long stocks.”

However, Price adds, “it’s been a great opportunity if you have money to put to work.”

It’s the Warren Buffet rule of investing: sell when everyone is buying; buy when everyone wants to sell. 

When the market is down, that’s a great time to start snapping up cheap assets.

As importantly, Price emphasizes, it isn’t just that major declines are temporary. It’s that they’re usually quite short-lived.

“Of the 10 worst starts to years on the stock market, just two ended up declining further from that point through Dec. 31 of those same years. One of those two, the year 2001 gave up just 0.26% more.”

In addition, “The lone example of significant continuing losses was 2008. That year’s stunningly bad selloff continued through March 9, 2009 before making a 180-degree turn, which resulted in a 43% gain over the remainder of that year.”

And in fact, “the average of all 10 putrid starts morphed into average gains of 29.10% going forward to year-end, including the two down years (2001 and 2008).”

The takeaway? In part, this is a lesson on investments. Buy when prices are low.

However in more technical terms, it’s that the value of your holdings moves counter-cyclically with the market. When the market is rising, that’s a good time to hold a lot of stocks. Those assets will gain value as prices rise (until you sell them, ideally during this high point). When the market is low, that’s a good time to be cash-heavy. You’ll have the money on hand to invest.

The counterpart position can leave an investor somewhat paralyzed. If you’re cash-heavy during an up market, it’s hard to find investments that will justify the expense. Your gains will probably be marginal. If you’re stock-heavy during a down market, you generally want to hold on to those assets until they’ve recovered their value.

As a result, for an investor it’s wise to keep yourself ready to move. Don’t necessarily try to time the market, but do keep an eye on your liquidity. You don’t want to miss the opportunities that a down market can create.

Get more trading strategies and investing insights from the contributors on Real Money.

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